Financial Transparency Coalition

On 15^th June the European Parliament passed a resolution on progress towards the achievement of the Millennium Development Goals (MDGs): mid-term review in preparation for the UN high-level meeting in September 2010. This resolution sets out a number of recommendations for EU Member States ahead of the summit. It acknowledges that “all eight MDGs are currently off-target” and asks member states to adopt a leading, ambitious and united position to meet the MDGs before the 2015 deadline.

Photo: WL

Overall, this resolution is more ambitious than the position adopted by EU Member States in the June Council Conclusions on development and follows the path of other parliamentary resolutions such as the Guerrero and Domenici reports. However, the report on MDGs as adopted by the Development Committee was watered down in the vote held in the plenary session of 15^th June. The proposals of an interest-free moratorium and a tax on currency and derivatives transactions to fund the MDGs were rejected by the plenary.

The resolution’s call “not to broaden the definition of Official Development Aid (ODA) or count debt cancellation or other non-ODA financial flows as aid spending” is welcome at a time when the European Commission and Member States are attempting to further inflate ODA through “ODA+” or “whole-of-country “approaches. In this sense, the resolution’s insistence that climate funds should be “genuinely additional to existing aid commitments” is a welcome one. Furthermore, while the resolution reaffirms Member State obligations “to meet their 0.7% aid promises by 2015 at the latest”, it does not note their failure to collectively meet the 2010 targets, nor is there an analysis of how to bring this about or of how to avoid non-compliance in the future.

The call to untie all aid is a positive step– it will increase value for money and multiply the impact of ODA on economic development in recipient countries. The OECD has calculated that tying aid increases the costs of development projects by 15 to 30% due to limited competition. Aid tying also excludes firms from developing countries from obtaining contracts and thus prevents job creation and income generation in the South.

The call to “introduce enhanced accountability measures” and an “ODA peer review process” is a step in the right direction, but the resolution does not clearly specify how these initiatives should be implemented. ODA peer reviews already exist (for OECD DAC members), and while useful, they have proven to be insufficient.

Equally, the call to increase budget support is good news as this may improve ownership, predictability and ultimately the effectiveness of ODA. Similarly, the call on developing countries “to involve parliaments, local government, civil society and other non-state actors at all stages of policy formulation and implementation” is a crucial step to further develop the central aid effectiveness principle of ownership from country ownership to democratic ownership.

Tackling tax havens through greater transparency and country by country reporting

The resolution recognises that illicit capital flows “undermine developing countries’ capacities to generate their own resources and allocate more funds to poverty reduction”. It also “calls on all the Member States actively to crack down on tax havens, tax evasion and illicit financial flows, within the G20 and UN framework”. In order to do so and to mobilise domestic resources to achieve the MDGs, the resolution proposes enhancing tax transparency by improving international accounting standards, adopting a country by country reporting standard and the “systematic disclosure of profits made and taxes paid” by firms operating in developing countries.

The resolution also “calls on the EIB to review its policy on offshore financial centres on the basis of more stringent criteria than the OECD listing for the definition of prohibited and monitored jurisdictions, and to ensure its implementation and provide annual reports on progress”. However, the report sorely misses a mention of the need for a multilateral and automatic information exchange on tax matters– a necessary measure for achieving  a truly transparent international tax environment that will benefit developing countries.

The resolution calls for support for administration in developing countries to become more transparent and accountable and for developing countries “to sign the UN Convention against Corruption”. While a necessary wake-up call, the EP should have also acknowledged that corruption is often driven by briberies by multinational companies, including from the EU, and facilitated by secrecy jurisdictions or tax havens. Equally, it should have recalled that some EU Member States have not yet ratified the UN Convention on Corruption.

Progress in lending and borrowing standards but stagnation on debt work out procedures

The European Parliament recognises the need to improve lending and borrowing standards. It “calls on all the Member States to support UN initiatives and take measures to increase lender and borrower responsibility in the context of sovereign debt transactions”. This is encouraging as several European governments are currently lowering due diligence standards while at the same time increasing funds available for private sector lending and investment in developing countries, therefore increasing the risk of new irresponsible loans. An EU initiative should build on the Eurodad charter for responsible financing which outlines key components of a responsible loan and investment contract. It should also include support for the UNCTAD project on responsible lending and borrowing.

The proposal of an interest-free moratorium was rejected by the plenary. Given the importance of debt resolution stated in MDG 8 and the increased risk of a new debt crisis in Low  and Middle Income Countries following the global financial crisis, it is disappointing that the EP resolution ignores civil society and developing countries’ demands to set up a fair and independent debt workout procedure. Existing debt relief mechanisms have proven incapable of solving previous debt crises and have not managed to prevent debt distress. Only by a comprehensive and independent mechanism holding lenders as well as borrowers to account for irresponsible behaviour can a new debt crisis be avoided.

Recognition of the UN as the main and more inclusive forum for global governance

The resolution acknowledges that the UN should be at the centre of the global governance system, above the G20 and the G8. Furthermore, it calls for a better representation of developing countries in the World Bank and IMF. This is a welcome step, but the resolution does not provide particular recommendations on how to proceed with this. CSOs have long called for a consolidated single EU seat at the Bretton Woods Institutions and for an increase in the proportion of developing country seats on the board so that each Executive Director represents a constituency of no more than 10 countries.

Policy coherence for development

The resolution correctly points out that poverty reduction through the achievement of the MDGs must be recognised unambiguously as the overarching framework for EU development policy and that this must be reflected clearly in all relevant policy “. This should especially apply to policies on financial regulation, including debt resolution mechanisms, and policies to fight capital flight.